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The Metropolitan Strategy - Sydney's blueprint for development - estimated in 2005 that the city would need an extra 640,000 dwellings by 2031 but a co-author of the report now says up to 876,640 will be needed.

"The numbers are somewhat alarming. It means we really do need to refocus our attention on how we will accommodate Sydney's growing population and we are not producing anything like the targets needed to meet this demand," Patrick Fensham, a director at SGS Economics and Planning, said yesterday.

"That will mean pressure on housing affordability, people staying at home longer, cramming in more bodies than people like to in the house. We need a policy response," said Mr Fensham.

SGS used the latest population projection figures from the Australian Bureau of Statistics to calculate that up to 575,295 new units or houses will need to be built in existing suburbs over the next 23 years, while up to 301,345 new dwellings will be needed on greenfield sites in Sydney's outer areas. That is about a third more homes than the Metropolitan Strategy assumed would be required, said Mr Fensham.

"It goes to the fact that the Federal Government has immigration running at very high levels and we have had a spike in fertility rates too. Partly, the immigration is in response to the need for skilled labour and there's no doubt immigration is an important thing but we need to recognise there are implications," he said.

"These new projections are being driven by policy outside of the State Government's control. We need a sophisticated conversation about population growth and the Federal Government needs to be part of that."

Sydneysiders, especially in established suburbs, should be prepared to see a lot more blocks of flats going up in their backyard.

"This problem ain't going away and it's no good having your head in the sand. We can't keep consuming land on the fringe at the rates we have in the past and we have to protect agricultural land," he said. "What we could do is look at this as an opportunity to improve communities, to invest in open space rather than doing this in a piecemeal, ad hoc way."

A spokesman for the Department of Planning, Mark Skelsey, said the State Government was monitoring long-term population trends. "It should be noted that higher population growth does not always translate into a requirement for extra dwellings, for instance if there is a change in average household size statistics," he said.

The president of the Local Government Association, Genia McCaffery, said councils would do their best to approve enough new development to meet demand.

"But Sydney can't just keep filling up with people without the infrastructure. We keep hearing about public transport initiatives being announced and then de-announced," she said. "There is also a critical shortage of playing fields."

The Housing Industry Association said yesterday that the number of new homes being built in NSW had dropped by 37 per cent since 2002-03.

A report due to be released today by the economic forecasters BIS Shrapnel found high land prices had driven the number of lots released from nearly 9000 lots in 1999-2000 to fewer than 3000 lots per annum since 2003-04 - a similar level to that of Adelaide.

The report found land costs, development costs and government taxes conspired to discourage development of new homes, which would worsen the shortage.